Pot Factories A Gamble For Oakland?

By
Cecily Burt, Oakland Tribune
on August 3, 2010

Oakland rushed last week to raise medical cannabis business taxes and to be the first city in the nation to legitimize industrial-sized pot production. The cash-starved city is hoping to reap millions of dollars in tax revenues from medical cannabis businesses while positioning itself to capitalize on the explosion of recreational pot sales should state voters go that way in November.

But is it just a pipe dream? No one really knows whether Oakland will find that pot of gold in the cannabis industry. Growers and dispensaries are making money, to be sure, and the city wants its share. But competition, legal risks and the unknown economic effects from potential legalization make the sure bet anything but.

California voters in 1996 overwhelmingly passed Proposition 215, the so-called Compassionate Use Act, which decriminalized medicinal use of marijuana. Dispensaries popped up almost overnight, supplied by a cottage industry of growers selling pounds of pot for $2,500 to $3,500, tax-free. Retail prices are double that, but not enough to stop the flood of patients willing to spend more than $300 an ounce for high-grade marijuana.

The estimated value of California’s pot crop is $13.8 billion, according to an analysis for California NORML, a nonprofit organization devoted to marijuana reform. About 3 million people in the state use marijuana, medical and recreational, and consume an estimated 1 million pounds a year.

Oakland’s four medical marijuana dispensaries do their share, supplying patients with 6,000 pounds of pot worth $28 million last year. The city is asking voters to raise business taxes on medical marijuana sales to 5 percent, a rate that dispensaries, patients and small growers warn will drive them out of Oakland and into neighboring communities with lower tax rates or no taxes at all.

The four new industrial-sized farms the city plans to license in January should do well, given the growing demand for medical marijuana across the state. But the ventures are not without risk. State law allows medical marijuana cultivation by collectives of patients and caregivers, with no profiteering.

Although the Obama administration has pledged a hands-off approach to honor states’ laws, several experts warn that the federal government may not be able to ignore commercial-sized growing and manufacturing plants, which are not allowed under current state law.

That is a concern expressed by Oakland Councilmember Nancy Nadel, who sees pros and cons in the plan and worries about excluding small growers. “I was willing to go along with some large growers, but is this an invitation to federal attention? It puts a lot of product in one space, so if there is a fire, or theft, or mold, you could impact the availability of product to the patients,” Nadel said.

New tax revenue

Still, it’s easy to see why the City Council majority backs the concept of large indoor farms. Regulating medical marijuana production in modern facilities located in industrial areas should ensure a reliable, consistent supply of high-grade marijuana. It conceivably should cut down on the hundreds of dangerous, illegal grow houses spread around Oakland, especially if the huge growers can offer lower wholesale prices. It also makes it easier for the city to track the money.

Perhaps the most convincing argument arrived in a report commissioned by Jeff Wilcox, a retired contractor who first approached city leaders about the commercial grow idea. His proposal for a 100,000-square-foot AgraMed cultivation facility would produce 21,000 pounds of pot with a wholesale value of $60 million. That translates into $3 million in new tax revenue for the city and 300 to 400 jobs for Bay Area residents — from just one business.

That’s on top of the revenue the city will get from its four dispensaries. If sales remain static, the city stands to gain another $1.4 million.

Dale Gieringer, director of California NORML, says Oakland is smart to get ahead of the curve, and it could gain millions in new tax revenue if the city’s sales and production estimates pan out. But setting too high of a tax rate could backfire initially, and he thinks that establishing the large-scale production facilities will be neither quick nor problem-free.

“I think there is a risk here on jumping ahead on this tax on medical marijuana,” Gieringer said. “San Francisco doesn’t have a tax. At 5 percent, this gives other places an advantage. Oakland could be in danger of killing the goose that lays the golden egg. Patients will not go to Oakland if they can go to San Francisco and get it cheaper.”

Oakland might have been the first to realize the revenue benefits of taxing medical marijuana businesses, but several other economically strapped municipalities are following its lead. San Jose, Richmond and others are scrambling to place similar tax measures on the November ballot. Berkeley is asking voters to raise cannabis tax rates as well as allow up to six commercial cultivation facilities.

Oakland’s four proposed cultivation permits are intended for medicinal production only — for now. The proposal also lays the framework should Proposition 19 pass in November, legalizing recreational use of pot for adults 21 and older. The city is asking voters in November to set the business tax rate for recreational sales at a whopping 10 percent.

But will it be a bonanza or bust?

Legalized pot

According to a RAND Corp. study released this month, legalization could boost the number of pot smokers and drive down the pretax price of an ounce of pot by as much as 80 percent. The authors warn that it potentially could fuel problems with smuggling as dealers from other states rush to buy low-cost cannabis in California.

“Legalization would drive the price so low that even if taxes are high, marijuana coming from California would still be cheaper than a lot of places in the country,” said Beau Kilmer, lead author of the study and co-director of the Drug Policy Research Center. “If dealers come here to buy several pounds, pay the taxes and then smuggle it out, they would still make money.”

Even with hefty state or local taxes added on, consumers likely would pay hundreds of dollars less than they do now. That’s good news for patients who rely on the herb to ease their pain, control their nausea or boost their appetite, but it could put a huge dent in the amount of tax revenue the city collects from its medical marijuana dispensaries.

If the wholesale price of medical marijuana drops to $800 a pound, a scenario Wilcox said could happen, the city’s cut would drop to $1.35 million.

“Right now there’s an 85 percent profit margin (enjoyed by the growers and dispensaries), and that’s too high, in ?my opinion,” Wilcox said. “If you can grow for $400 and sell it $800 wholesale, people will be doing just hunky-dory.”
Oakland Councilmember Desley Brooks said she’s not pinning all her expectations on legalization, especially when there is plenty of revenue to be had from the medical cannabis industry.

“There’s a lot of money in that industry and not a lot of regulation,” she said.

Kilmer said his work focused on what might happen if marijuana were legalized in California. The Regulate, Control and Tax Cannabis Act 2010 ballot initiative would allow people 21 and older to possess, grow or transport small amounts of pot for personal use. Cities and counties could choose whether to regulate and tax the commercial cultivation and sales of marijuana or to keep such activities illegal.

“The impacts of legalization on medical marijuana is unknown,” Kilmer said. “But it will be interesting to see what happens in Oakland because it’s unclear what the feds will do” about the commercial growers.

Mark Kleiman, a UCLA professor of public policy who has written extensively on the topic, believes cities such as Oakland that are hoping to cash in on medical marijuana, and legalization if it happens, should try to see through the dollar signs to the possible pitfalls.

“Yes, (Oakland is) in for a big letdown,” he said. “Competition among growers and among jurisdictions would drive legal prices through the floor, leaving California with a large (illegal) export trade to the rest of the country and not much revenue. The feds wouldn’t hold still for it and would crack down.”

He lit Oakland’s fire for pot factories

Retired builder Jeff Wilcox’s vision of a ‘business park of cannabis’ stoked the council’s appetite for the jobs, and tax revenue, such a thing could generate for the desperate city.

Jeff Wilcox lopes across the nearly empty parking lot, aiming for a large brick building. Inside, he excitedly shows off the cavernous space, once used to make wire, vacant now for a decade. He imagines it running 24/7, filled with glowing lights, gurgling irrigation systems, whirling ventilators and workers coaxing thousands of pungent marijuana plants to bud.

And that’s just one part of his proposal. Wilcox, a retired builder, owns a campus of aging, idled industrial plants. On a wall in an unused conference room, a sketch of the property shows how he could fill most of the 172,000 square feet with growers raising high-end pot and entrepreneurs turning out brownies, drinks, tinctures and other products.
“My idea was a business park of cannabis,” he said.

He sold the idea to Oakland’s City Council. Desperate for new jobs and tax revenue, the council gave its final approval last month to allow four enormous marijuana factory farms. Wilcox and more than 220 others have expressed interest in applying for the permits to be awarded next year.

The city’s audacious plan has inspired talk that Oakland could become the Silicon Valley of pot, home to the world’s first state-of-the-art marijuana start-ups.

Comparing the economic potential of tetrahydrocannabinol to silicon chips may seem far-fetched. Some observers dismiss the notion as the fever dream of budget-traumatized politicians. But others think Oakland could be uniquely positioned to capitalize on the business opportunities created by the growing tolerance toward marijuana.

Rebecca Kaplan, the City Council member who pushed the plan, has a simple retort when asked whether the vision of Oakland at the center of a marijuana economy is fanciful: Montel Williams. The television talk-show host and motivational coach has multiple sclerosis, smokes marijuana to relieve nerve pain and has visited Kaplan, as she put it, “live in City Hall.”

“He has wanted for years to open up a facility where he could produce really high-end medical cannabis extracts,” she said, explaining that Williams heard through the grapevine that Oakland was the place to do it. “I would love to have Montel Williams here running a business.” Williams could not be reached for comment.

Kaplan said she believed that Oakland has two essential ingredients other California cities do not: political will and industrial space. “Oakland has been a major hub of the medical cannabis movement, so that’s part of what I mean when I say political will,” she said.

No other city has provided such red-carpet treatment. Oakland is essentially trying to set up legal sanctuaries for pot businesses, although the move may prove too brazen for federal narcotics agents who recently called city officials to request a copy of the ordinance.

Only Berkeley, its liberal neighbor, has considered anything similar. The city will ask voters to approve six marijuana operations no larger than 30,000 square feet. But Oakland has 10 times the available industrial space, about 2.3 million square feet, and it rents for half the price.

Berkeley Mayor Tom Bates said Oakland’s stock of empty industrial buildings could make it a “major player.”
“Oakland is trying to become the growing mecca of the north,” he said.

Jeff Jones, who founded Oakland’s first cannabis club, noted that the bayside city has another advantage. “Oakland is not Holland, it’s not Amsterdam; it’s more like Rotterdam. It’s going to be a hub for transport,” he predicted. “I can imagine walking into Holland’s coffee shops and finding a strain of cannabis marketed as made in California.”

There are skeptics. “I think it’s a big stretch,” said Larry Tramutola, a political consultant who lives in Oakland. He said marijuana could have a long-term economic effect on the city but thought it would be minor. “I don’t think it’s going to solve all the budgetary issues,” he said.

Even Dale Gieringer, an Oakland resident who as the head of California NORML advocates for marijuana legalization, has doubts. He noted that state law blunts the get-rich-overnight incentive that powers Silicon Valley. Only nonprofit collectives are allowed to grow pot.

But Oakland, like Silicon Valley, has been fertile ground for entrepreneurs and innovative thinkers, luring them from all over. Jones is from South Dakota. Richard Lee, who started the first trade school to train marijuana businessmen, moved from Texas. Steve DeAngelo, who came from Washington, D.C., runs Harborside Health Center, a $20-million-a-year dispensary that has become the largest and arguably the most professionally run marijuana retailer in the world.
“As we get closer and closer to legal cannabis, more and more new players are going to want to get into cannabis,” DeAngelo said. “I think it’s a sign that this industry is emerging out of the shadows and into the light, and we are gaining acceptance among mainstream figures.”

Wilcox is one of those mainstream figures. He says he started smoking pot when he was 15 and now uses it medicinally for back pain, but the 50-year-old single father with three teenagers is strait-laced. He sold his construction firm five years ago and retired. But he was bored. He didn’t see marijuana as a business opportunity until DeAngelo approached him about growing in his buildings, which are next to Harborside.

“I don’t look like a pothead, obviously,” he said, “and I struggled with the moral issues for a while, security issues, everything else; and then I decided I wanted to do something with my life.”

Now he is Oakland’s equivalent of a Sand Hill Road venture capitalist and a tilt-up office developer rolled into one. He has money, connections and 7.4 acres off Interstate 880.

Wilcox, who knows his way around City Hall after two decades as a major contractor, approached the idea shrewdly. He set up a company called AgraMed and spent $16,000 to study its economic potential. The 68-page report concluded that he could sell marijuana worth $59 million a year. With a 5% pot tax that the City Council decided last week to put on the November ballot, Wilcox’s operation could pay Oakland $3.4 million a year in taxes. “We did this to move the legislation,” he said.

He also sought help from Dan Rush, a local labor leader with City Hall clout, and promised to hire hundreds of union workers. He reached out to Lee, who is well-regarded at City Hall. He donated $20,000 to the legalization initiative that Lee is backing in November. He hired a lobbyist. He made a few modest political donations.

And he made it known that he was willing to spend $20 million to convert his buildings into an incubator for marijuana businesses. “It’s just such a mind-boggling thing. It makes you speechless,” said Arturo Sanchez, who oversees the city’s medical marijuana programs.

Wilcox won over City Council members despite intense opposition from some marijuana activists and growers who supply the Oakland market. Wilcox, who cheerfully acknowledges he enjoys a good brawl, boasts that he won the turf war.

“There was a transfer of power,” he said. “In essence, you could say big business is here.”

As the Jan. 22 deadline to accept or decline cannabis shops looms, more than a...

Comments

1 Comment

one12alpha on
August 4, 2010 5:23 am

The mass immigration of people from the rest of the US will throw the earth off balance. This will elongate the orbit around the sun, and we could potentially drift off into space, or worse…crash into the sun!

LoL…Thought I’d throw in some BS propaganda. Wow, I feel like I’m ready to head the Office of National Drug Control Policy now….